Farmers Turn to Micro Captives

By Scout Nelson

Over the past 25 years, farmers have gained a better understanding of how crop insurance works. During this time, the insurance market—including crop, property, and casualty insurance—has changed significantly. Crop insurance premiums per acre have increased, and insurance contracts have become more complex. Property and casualty insurance have also seen rising costs, with higher premiums and deductibles, and in some cases, reduced coverage.

As farmers deal with these rising costs and complexities, an alternative option has gained attention—micro-captives, also known as Section 831(b) insurance companies under U.S. tax law. A micro-captive is a small insurance company owned by the insured, typically used to manage specific risks and financial strategies within a business. These entities have existed since the 1986 Tax Reform Act and offer several advantages, such as underwriting profits that are not taxed and the ability to create customized insurance coverage.

Micro-captives can help protect farm operations, manage costs tied to expensive commercial insurance, and provide financial benefits if claims are minimal. While startup and annual administrative costs exist, especially in the early years, these may become more manageable as the business grows.

One strategy for using a micro-captive involves crop insurance. For example, a producer may have a standard crop insurance policy covering 70% of expected revenue. To increase coverage without relying on more costly or less accurate options, the farmer could use a micro-captive to cover losses from 70% to 91%. If there are no claims, the unused premium stays in the micro-captive. If a claim arises, the farmer receives payment through both the commercial policy and the micro-captive.

Micro-captives can also help with other coverage needs, like equipment insurance. The key is designing tailored coverage that addresses specific risks. However, setting up and managing a micro-captive requires careful planning and compliance with tax laws and regulations.

With the growing challenges in traditional insurance, micro-captives offer new financial tools for farm businesses. For those ready to manage the added complexity, this approach may provide a strategic advantage in future farm risk management.

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